Water

Water availability: September 2019

26 August 2019

Rainfall

Outlook

The most recent rainfall and climate outlook from the BOM isn’t looking positive. Below-median rainfall is expected across most of Australia during the September-November period as shown by the following map.

http://www.bom.gov.au/climate/outlooks/

The drier conditions are being driven by the Indian Ocean Dipole (IOD). The IOD in August has been roughly +0.8C and the models are predicting it will remain positive right through Spring. A positive IOD typically means reduced rainfall across SE Australia.

The JAMSEC (Japanese Climate Model) has been very accurate with rainfall predictions (select Precipitation Anomaly) in recent times. They also provide projections over a longer timeframe and their March-May 2020 predictions are showing as average.

In the end, these are all just models which show the likelihood of an outcome.

Recent Rainfall and Inflows

The IOD being in positive territory since June and the rainfall decile maps below show the result – below average rainfall for the southern MDB and very much below average for the northern MDB.

Inflows to the major storages as reported by the MDBA have been mixed as shown in the following chart. Despite the below average rainfall, the combined Murray storages (Hume & Dartmouth) have seen 166GL more inflow than last season. Eildon is tracking slightly behind last season while inflows to the combined Murrumbidgee storages are 20GL lower.

In a recent presentation by the BOM (at the Sydney launch of the Aither Water Market Report 28 August 2019), it was stated that the MDB would require its highest ever recorded rainfall from now until the end of December just to make 2019 an “average” year. Given this is extremely unlikely, the last 3 years will be the driest 3 year period over the 119 year rainfall record in Australia.

Determinations

Despite the mixed bag of inflows compared to last season, as at 2 September 2019, the various classes of entitlement have received the determinations shown in the following table. We’ve also shown the determinations at the same time last season (Sep 2018) as a comparison along with the inflow scenario we appear to be tracking.

SystemClassSep 2018Sep 2019Inflow scenario
NSW MurrayHigh97%97%
General0%0%<Dry
MurrumbidgeeHigh95%95%
General6%6%Dry
South AustraliaHigh100%68%
Vic MurrayHigh71%33%>Dry
GoulburnHigh56%37%Average

A few things to note in the table above;

  1. SA changed the way they announce determinations. From 1 July 2019 they are making progressive announcements as resources improve, in line with other states.
  2. SA committed to using their desalination plant this season and as a result, 50GL of entitlements typical used to supply Adelaide with potable water are now supplementing irrigator determinations.
  3. The nominated Inflow Scenario is based on previous outlooks released by the various water authorities. Inflows can change rapidly and this can have consequences in the market.

Determination Outlooks

All states have been updating their seasonal determination outlooks. The most recent updates (mid-July for NSW and mid-August for remaining systems) are projecting the following mid-February determinations based on dry and average inflows.

System/ClassDry InflowAverage Inflow
NSW Murray GS”7%30%
Murrumbidgee GS10%25%
Vic Murray HR52%100%
Goulburn HR48%95%
SA HS100%100%

“Seems very unlikely that NSW Murray General Security will reach 7% given they are nearly 100GL behind filling their Conveyance Licence.

Given the recent climate conditions, it seems unlikely that we’ll receive average inflows. In fact, the projected determinations under dry inflow scenarios in the Victorian systems has been getting lower with each subsequent update. Having said that, Victorian is generally conservative when forecasting determinations.

Water availability

Water availability in each region is a result of supply, demand and trading constraints, each of which is explained in further detail below,

Constraints

The 3 key constraints on allocation moving to where it is required are currently closed – the Murrumbidgee IVT, Goulburn IVT and Barmah Choke. These closures have meant there are four (4) separate trading areas in existence – Murray below choke, Murray above choke, Goulburn and Murrumbidgee.

Each of those regions have their own unique supply and demand dynamics which ultimately has consequences for both the value of allocation and entitlements.

Demand

With current allocation prices close to or exceeding $600 per ML in all systems, the number of agricultural commodities capable of utilising water economically reduces.

Rice

The recent announcement 2020 rice prices from SunRice starting at $750 per tonne has increased the ability to utilise water up to $600 per ML. Having said that, there is a marginal return and assumes no production risk. Some growers will have access to groundwater which will lower their overall water costs.

Dairy

Milk prices have been improving. Many farmers have consolidated their herds and focused their valuable water resources onto their most productive pastures.

The ability to supplement feed from external sources is allowing dairy farmers to remain adaptive. With excellent rainfall in the Mallee region, many are banking on good availability of grain and cereal hay.

We expect water use in dairy to be lower than previous year given the high water prices and it is likely that most usage will cease at the end of spring. Many dairy farmers will likely keep any unused water for usage in autumn.

Horticulture

All horticultural commodities remain strong and they have greater margins to pay higher prices for water than all other commodities. Increased water prices will present challenges in some businesses. If these elevated water prices are sustained, horticulture will start to consolidate and contract.

In the Lower Murray region, work completed by Aither for the Victorian Government suggests water demand by horticulture is 1,230GL per annum based on the current plantings and expected to rise to 1,400GL once current plantings reach full maturity.

Supply

The following table shows the water available to private irrigators in the Murrumbidgee, Goulburn and Murray systems as at 2 September 2019. We have also included forecast water availability based on determinations under a dry inflow scenario (see above) for all systems but the Goulburn which we’ve used an average inflow scenario.

System/ClassAvailable 2 SepForecast Feb
Murrumbidgee448513
General Security97162
High Security339339
Carryover112112
Trade in/out-100-100
Murray#1,4391,735
NSW General Security00
NSW High Security170170
NSW Carryover264264
Vic High Reliability291440
Vic Carryover190190
South Australia High Security283430
SA Carryover102102
Trade in/out139139
Goulburn406834
High Reliability272697
Carryover173173
Trade in/out-39-39

# At present, there is no way of knowing what water is above or below the choke. None of the reports from the Victorian nor NSW governments separate the volumes. In the opinion of H2OX, it is imperative that water users understand the current availability given all the constraints to make informed decisions. H2OX has raised this with both governments and relevant water authorities but we are yet to see any change of reporting.

Based on a dry inflow scenario and the forecast demand, especially in the horticulture space (see below), there will be significant challenges in sourcing water in the Lower Murray region (below choke).

Looking at the estimate volumes, there will be sufficient water available to meet the estimated horticultural requirement of 1,230GL however, there is no visibility on above/below choke availability as described in the # note above.

Running an eye down the estimated February volumes for the Murray system, the 1,650GL number rapidly reduces. Without improved inflows (above dry scenario) or the opening of trade restrictions, the water market in the Lower Murray region will be a very interesting place.

H2OX Outlook

Forecasting water availability and prices is close to impossible as it is influenced by a multitude of external factors including weather events (rainfall, extreme heat), commodity prices along with the overall supply and demand described above.

Based on the information above, H2OX puts forward the following predictions based on a conservative view that we are tracking on along the dry inflow scenario;

  • Allocation prices will remain historically high* in all systems until we receive significant inflows to the major storages which is unlikely until the end of the season at best.
  • There will be price fluctuations as the trade restrictions open and close throughout the season however
  • We are unlikely to see the Barmah Choke open this season unless there is a significant upstream trade (environmental water) or increased volumes are delivered through alternate infrastructure
  • Allocation prices in the Lower Murray (below choke) will be significantly higher than other regions
  • Prices in the Goulburn are likely to dissipate from November once water use through tagged accounts cease.
  • The Goulburn IVT will open but, depending on the implementation of the new operational rules, it will likely be later in the season i.e. March or later, with a much smaller volume traded out than the 440GL last season
  • The Murrumbidgee IVT is likely to be called on for deliveries and this will see trade to the Murray open. It will close “instantly” every time the trade opportunity opens, due to market participants moving water out into the higher value Murray market
  • If the season remains dry, demand for carryover will be high. This will maintain pressure on prices heading into the 2020-21 season.
  • The demand for carryover may start well before the end of the season and this will put further pressure on an under-supplied allocation market especially in the Lower Murray.
  • Some irrigators will look to other regions to source carryover and hope they can move that water to where it is required (Lower Murray) as trade opportunities arise.

Summary

The MDB is well into its third year of below average rainfall. This has seen storage levels drop and catchments dry. The positive IOD means lower rainfall are likely and inflows to storages will also be significantly below average.

Seasonal determinations will be significantly lower than previous years and this, combined with lower carryover volumes will result in reduced water availability. The availability will be compounded by trade constraints through the Barmah Choke, Murrumbidgee & Goulburn IVT’s.

Based on the forecast volumes, prices in the allocation market are likely to remain high* for the remainder of the season, especially in the Lower Murray region. This will result in a challenging environment for those businesses exposed to the temporary water market


* Unlike brokers, H2OX doesn’t benefit from high allocation prices. H2OX charges one low flat fee of $2.20 per ML for allocation transactions. H2OX – save on fees, save on your water.

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